Difficulties building at Beazer Homes

Mortgage business facing heat over probes into loan practices

By

JohnSpence

BOSTON (MarketWatch) -- Problems are mounting for one of the nation's largest builders of residential homes.

Beazer Homes USA Inc.
BZH, -1.90%
has seen its stock lose about two-thirds of its value over the past three months as it struggles against the housing downturn, difficulties in the mortgage market and multiple investigations by regulators.

Beazer was unable to file its quarterly 10-Q report on time due to an ongoing accounting review, but after Wednesday's closing bell it disclosed unaudited financial results for the period ended June 30 "to provide the company's stockholders and the holders of its outstanding debt securities with updated financial and other information."

The Atlanta-based company said it delayed its Form 10-Q because of an internal investigation of "certain evidence" that its mortgage subsidiary "violated U.S. Department of Housing and Urban Development regulations and may have violated certain other laws and regulations in connection with certain of its mortgage origination activities."

Beazer and other home builders -- such as Toll Brothers Inc.
TOL, -2.70%
D.R. Horton Inc.
DHI, -2.12%
and Pulte Homes Inc.
PHM, -1.85%
-- have been hit by worries spreading out from subprime loans, which have further weakened the outlook for a slowing housing market.

Tighter lending standards triggered by rising defaults will make it harder to buyers qualify for home loans, which in turn drains housing demand. Home builders have seen profits squeezed by lower prices, falling orders and cancellations.

Several other builders face stiffer headwinds operationally than Beazer and are less liquid in the current credit crunch, said Eric Landry, an analyst at Morningstar Inc.

"The problem pure and simple for Beazer is the uncertainty surrounding the investigations," he said. "Couple that with a late filing and bondholders who may not want to work with the company, and there are potential issues."

Late last week, Beazer said its investigation of the mortgage-origination business found potential accounting irregularities. Beazer's previous chief accounting officer, who was fired in June, may have inflated reserves and other accrued liabilities related to land-development costs, the company said.

It's not clear if the company will have to restate previous financial results, although Beazer said it doesn't believe the amounts at issue regarding reserves and accrued liabilities are "quantitatively material." It also doesn't think the resolution of the investigation will lead to an adjustment to Beazer's previously reported cash position.

A Beazer spokeswoman didn't immediately return a call Thursday morning seeking comment on the Form 8-K filed a day earlier.

On Aug. 1, Beazer, which is the nation's sixth-largest home builder measured by 2005 deliveries, issued a statement calling rumors about its liquidity and a possible bankruptcy filing "scurrilous and unfounded."

Investigations

Beazer was the focus in a "Heard on the Street" column Thursday in The Wall Street Journal, which like MarketWatch is published by Dow Jones & Co. The story said the company's stock has seen big swings this summer as investors and hedge funds debate the company's future. The bears may be winning at the moment, while the recent disclosure of accounting problems is expected to speed up a Securities and Exchange Commission probe that started in May, the newspaper reported, citing a person familiar with the matter. One possible focus of the SEC investigation is whether Beazer was properly disclosing its mortgage practices to investors, according to the report.

Beazer said it and its mortgage unit are responding to a request for documents by the U.S. Attorney's Office in the Western District of North Carolina. It is also under investigation by the SEC for possible violation of federal securities laws and is facing securities class-action lawsuits.

The investigations were sparked by a series of articles the Charlotte Observer newspaper ran in March, alleging the company was arranging questionable loans for lower income home buyers, which were resulting in high foreclosure rates.

In Wednesday's 8-K filing, Beazer said ongoing investigations and litigation have subjected it to "negative publicity" which it believes is discouraging potential customers from buying homes. The company said it has lost several key divisional employees.

"We also believe that these circumstances have adversely affected morale and could lead to increased employee turnover," the filing said. "In light of these ongoing matters, we have found it increasingly difficult to attract qualified individuals to replace the employees we have lost."

Major ratings agencies have placed Beazer under review and in some cases cut the company issuer grade.

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